Financial decision making ability is the need of the hour for all
Financial decision making ability develops when you are financially literate. A genuine Certified Financial Planner will educate you and assist you in implementing action plans laid down in the Financial Plan.
“We were not taught financial literacy in school. It takes a lot of work and time to change your thinking and to become financially literate.” ~ Robert Kiyosaki
In the last few decades, financial market has become increasing accessible to all investors, including retail investors. Although there’s accessibility to information is increasing, the financial products are also becoming complex. “All financial products have two effects – to help & to harm.”
You often buy financial product/s without knowing much about both the merits & demerits. It can be expensive (due to hidden costs) and turn out to be a bad financial solution even to a rich a person. Your needs should be associated with the financial products.
Why are you more obsessed with personal assets than with investment assets? This is due to lack of financial decision making ability
Personal assets give you comforts of life but they don’t generate income. Personal assets mean residential house, car, jewellery etc. You may be obsessed because personal assets are tangible whereas financial assets are not.
Your obsession may be a reflection of your herd behavior. Can you generate income from personal assets? It’s unhealthy if personal assets owned are higher than the standard range. Moreover, you may have to sell your personal assets in distress at a price that is much below its market value in case of cash crunch (emergency situation).
As Certified Financial Planner in Kolkata, we have experienced through our practice that when there is a liquidity crunch, you’re forced to sell your personal assets and compromise with your comfort and status. These are painful experiences, which are better not to be experienced. Can you you shift from a 3 BHK to 1 or 2 BHK? If yes, then you’re “compromising” yourself and this is not “adjustment”. Is it for status or comfort or other complex behavior?
“Compromise brings harmony to both, happiness to none.” ― Amit Kalantri
Possessing financial decision making ability will lead you towards financial wellness.
People don’t always act in their own best interest. They become impulsive buyers. They dig themselves in debts. As Financial Advisor in Kolkata, we have seen people borrowing money quite often – this may be for buying personal assets or to meet day to day necessities. Ultimately they don’t have any scope for savings or investments.
You’ll need to be aware about your responsibilities towards your dependents. You’ll have to know the future costs to fulfill all commitments. Knowing the effects of inflation, interest rate risks, taxation, liquidity, etc. will motivate you to control your unwise spending habit. You may try to keep yourself on the right track. Your financial freedom will depend more on your own decisions and behavior. General literacy and financial literacy are not the same. Without financial literacy you can hardly enjoy financial freedom.
How you borrow and manage your liabilities? These are financial decision making situations
Managing liabilities is not a good solution. You may fall in a debt trap. It’s almost like circle. You have to struggle a lot to come out from circle.
“You must gain control over your money or the lack of it will forever control you.” ― Dave Ramsey
Do you want to build assets or manage your debts?
To manage debt, you have to have the capacity to do complex calculations. But how numerically literate are adults? Specially, when it’s related to calculations in personal finance. The level of financial literacy is very low. It’s not your fault – it’s lack of awareness and mostly tendency to listen to tips of people does enough damage. You have to come to abstract and subjective financial decisions – you need to develop cognitive thinking. You need to arrive at logical conclusions from a set of observations and calculations.
Lack of numerical literacy is severe among some demographic groups, like elderly people irrespective of men and women, also rising among millennials and working population. The reasons are complex financial products, multiple options, media hypes, sales pitches, tips of family members and friends, etc.
Basic financial literacy is the need of the hour. You must understand the concepts of the following aspects:
- Delay cost due to inflation
- Time value of money and compound interest
- Risks
- Family budget (Cash flow)
- Difference between investment and savings
- Implications of different taxes (direct & indirect)
- Safety and liquidity
- Wealth accumulation and distribution
- Fraud protection
- Debt traps
Due to financial illiteracy, investors become victims of sales pitches of relationship managers of banks, insurance agents. As Arijit Sen is a SEBI Registered Investment Advisor in Kolkata, we understand the fact that financial products are very complex; sales persons sell only the benefits but never analyse the need of a buyer. They’ve their own business targets. Where there is a concept of commission (hidden costs), most of the investors are offered biased products by sales persons.
Although investors are aware of income tax, but they are not aware of inflation. This particularly happens when they opt for wealth creation. They often borrow money to save tax, e.g. house building loan by not considering cumulative effect of the amount of interest on a loan paid. Cost gets reduced by subtracting tax savings component. They may reduce their tax burden but they never calculate tax adjusted rate of return versus investment returns. There are also some exceptional cases where there is no alternative way but to take a loan. Unfortunately, an investor like you must look at your inflation and tax adjusted returns. The consequences are that you’re losing your purchasing power.
Do keep in mind, “today’s money is more valuable than tomorrow’s money.”
You may count upfront costs but not hidden costs. But upfront costs justify you the logic, while hidden costs don’t.
